After experiencing a downturn in 2023, merger and acquisition activity in several sectors is rebounding in 2024. If you’re buying a business, you want the best results possible after taxes. You can potentially structure the purchase in two ways:

1. Buy the assets of the business, or
2. Buy the seller’s entity ownership interest if the target business is operated as a corporation, partnership, or LLC.

Here, we’ll focus on the former. Keep reading to learn useful tax tips when buying the assets of a business.

Asset Purchase Tax Basics

You must allocate the total purchase price to the specific assets acquired. The amount allocated to each asset becomes the initial tax basis of that asset.

For depreciable and amortizable assets (such as furniture, fixtures, equipment, buildings, and software and intangibles like customer lists and goodwill), the initial tax basis determines the post-acquisition depreciation and amortization deductions.

When you eventually sell a purchased asset, you’ll have a taxable gain if the sale price exceeds the asset’s tax basis (initial purchase price allocation, plus any post-acquisition improvements, minus any post-acquisition depreciation or amortization).

Asset Purchase Results with a Pass-Through Entity

Let’s say you operate the newly acquired business as a sole proprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a partnership, a multi-member LLC treated as a partnership for tax purposes, or an S corporation. In those cases, post-acquisition gains, losses, and income are passed through to you and reported on your personal tax return. Various federal income tax rates can apply to income and gains, depending on the type of asset and how long it’s held before being sold.

Asset Purchase Results with a C Corporation

If you operate the newly acquired business as a C corporation, the corporation pays the tax bills from post-acquisition operations and asset sales. All types of taxable income and gains recognized by a C corporation are taxed at the same federal income tax rate, which is currently 21 percent.

A Tax-Smart Purchase Price Allocation

With an asset purchase deal, the most important tax opportunity revolves around how you allocate the purchase price to the assets acquired.

To the extent allowed, you want to allocate more of the price to:

• Assets that generate higher-taxed ordinary income when converted into cash (such as inventory and receivables),
• Assets that can be depreciated relatively quickly (such as furniture and equipment), and
• Intangible assets (such as customer lists and goodwill) that can be amortized over 15 years.

You want to allocate less to assets that must be depreciated over long periods (such as buildings) and to land, which can’t be depreciated.

You’ll probably want to get appraised fair market values for the purchased assets to allocate the total purchase price to specific assets. As stated above, you’ll generally want to allocate more of the price to certain assets and less to others to get the best tax results. Because the appraisal process is more of an art than a science, there can potentially be several legitimate appraisals for the same group of assets. The tax results from one appraisal may be better for you than the tax results from another.

Nothing in the tax rules prevents buyers and sellers from agreeing to use legitimate appraisals that result in acceptable tax outcomes for both parties. Settling on appraised values becomes part of the purchase/sale negotiation process. That said, the appraisal that’s finally agreed to must be reasonable.

Plan Ahead

Remember, when buying the assets of a business, the total purchase price must be allocated to the acquired assets. The allocation process can lead to better or worse post-acquisition tax results. The tax professionals at Ramsay & Associates can help you get the former instead of the latter. Getting your advisor involved early, preferably during the negotiation phase, is beneficial. Contact us today.

Are gratuities routine in your industry? If you own a business in which your employees are tipped for providing customers with food and beverages, we have good news. You may qualify for a federal tax credit involving the Social Security and Medicare (FICA) taxes that you pay on your employees’ tip income. Keep reading to learn about this tip tax credit and how to claim it, should you choose to do so.

Credit Fundamentals

The FICA credit applies to tips that your staff members receive from customers when they buy food and beverages. It doesn’t matter if the food and beverages are consumed on or off the premises. Although tips are paid by customers, for FICA purposes, they’re treated as if you paid them to your employees.

As you know, your employees are required to report their tips to you. You must:

• Withhold and remit the employee’s share of FICA taxes, and
• Pay the employer’s share of those taxes.

How to Claim the Credit

You claim the credit as part of the general business credit. It’s equal to the employer’s share of FICA taxes paid on tip income in excess of what’s needed to bring your employee’s wages up to $5.15 per hour. In other words, no credit is available to the extent the tip income just brings the employee up to the $5.15-per-hour level, calculated monthly. If you pay each employee at least $5.15 an hour (excluding tips), you don’t have to be concerned with this calculation.

Note: A 2007 tax law froze the per-hour amount at $5.15, which was the amount of the federal minimum wage at that time. The minimum wage is now $7.25 per hour but the amount for credit computation purposes remains $5.15.

Let’s Look at an Example

Hypothetically, let’s say a server works at your restaurant and is paid $2.13 an hour plus tips. During the month, she works 160 hours for $340.80 and receives $2,000 in cash tips, which she reports to you.

The server’s $2.13-an-hour rate is below the $5.15 rate by $3.02 per hour. Thus, for the 160 hours worked, she is below the $5.15 rate by $483.20 (160 times $3.02). For the server, therefore, the first $483.20 of tip income just brings her up to the minimum rate. The rest of the tip income is $1,516.80 ($2,000 minus $483.20). As the server’s employer, you pay FICA taxes at the rate of 7.65 percent for her. Therefore, your employer credit is $116.03 for the month: $1,516.80 times 7.65 percent.

While the employer’s share of FICA taxes is generally deductible, the FICA taxes paid with respect to tip income used to determine the credit can’t be deducted, because that would amount to a double benefit. However, you can elect to not take the credit, in which case you can claim the deduction.

Get the Credit You Deserve

If your business pays FICA taxes on tip income paid to your employees, this tip tax credit may be valuable to you. Other rules may apply. The tax professionals at Ramsay & Associates can help determine the best course of action for your business. Contact us with questions.

The optional standard mileage rate used to calculate the deductible cost of operating an automobile for business will be going up by 1.5 cents per mile in 2024. The IRS recently announced that the cents-per-mile rate for the business use of a car, van, pickup, or panel truck will be 67 cents (up from 65.5 cents for 2023). Keep reading to learn more about this increase to the standard business mileage rate and what it means for your tax deductions and expenses.

The increased tax deduction partly reflects the price of gasoline, which is about the same as it was a year ago. On December 21, 2023, the national average price of a gallon of regular gas was $3.12, compared with $3.10 a year earlier, according to AAA Gas Prices.

Standard Rate vs. Tracking Expenses

Businesses can generally deduct the actual expenses attributable to business use of vehicles. These include gas, tires, oil, repairs, insurance, licenses, and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.

The cents-per-mile rate is helpful if you don’t want to keep track of actual vehicle-related expenses. However, you still must record certain information, such as the mileage for each business trip, the date, and the destination.

The standard rate is also used by businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles for business purposes. Why? Under current law, employees can’t deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.

If you use the cents-per-mile rate, keep in mind that you must comply with various rules. If you don’t comply, reimbursements to employees could be considered taxable wages to them.

Rate Calculation

The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repairs, and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the rate midyear.

Cents-Per-Mile Rate Not Always Allowed

There are cases when you can’t use the cents-per-mile rate. In some situations, it depends on how you’ve claimed deductions for the same vehicle in the past. In other situations, it hinges on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.

Contact Us with Questions

As you can see, there are many factors to consider in deciding whether to use the standard business mileage rate to deduct company vehicle expenses. If you have questions about tracking and claiming such expenses in 2024 — or claiming 2023 expenses on your 2023 tax return — we can help. Contact the experienced tax professionals at Ramsay & Associates to learn more and get more information as it pertains to your specific situation.

One of the most appreciated fringe benefits for owners and employees of small businesses is the use of a company car. This perk results in tax deductions for the employer as well as tax breaks for the owners and employees driving the cars. (And of course, they enjoy the nontax benefit of using a company car.) Even better, current federal tax rules make the benefit more valuable than it was in the past. Keep reading to learn more about company car perks and tax rules.

Rolling Out the Rules

Let’s look at how the rules work in a typical situation. For example, a corporation decides to supply the owner-employee with a company car. The owner-employee needs the car to visit customers and satellite offices, check on suppliers, and meet with vendors. He or she expects to drive the car 8,500 miles a year for business and also anticipates using the car for about 7,000 miles of personal driving. This includes commuting, running errands, and taking weekend trips. Therefore, the usage of the vehicle will be approximately 55 percent for business and 45 percent for personal purposes. Naturally, the owner-employee wants an attractive car that reflects positively on the business, so the corporation buys a new $57,000 luxury sedan.

The cost for personal use of the vehicle is equal to the tax the owner-employee pays on the fringe benefit value of the 45 percent personal mileage. In contrast, if the owner-employee bought the car to drive the personal miles, he or she would pay out-of-pocket for the entire purchase cost of the car.

Personal use is treated as fringe benefit income. For tax purposes, the corporation treats the car much the same way it would any other business asset, subject to depreciation deduction restrictions if the auto is purchased. Out-of-pocket expenses related to the car (including insurance, gas, oil, and maintenance) are deductible, including the portion that relates to personal use. If the corporation finances the car, the interest it pays on the loan is deductible as a business expense (unless the business is subject to the business interest expense deduction limitation under the tax code).

On the other hand, if the owner-employee buys the auto, he or she isn’t entitled to any deductions. Outlays for the business-related portion of driving are unreimbursed employee business expenses, which are nondeductible from 2018 to 2025 due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act. And if the owner-employee finances the car personally, the interest payments are nondeductible.

One other implication: The purchase of the car by the corporation has no effect on the owner-employee’s credit rating.

Careful Recordkeeping is Essential

Supplying a vehicle for an owner’s or key employee’s business and personal use comes with complications and paperwork. Personal use needs to be tracked and valued under the fringe benefit tax rules and treated as income. This article only explains the basics.

Contact Us with Questions

Despite the necessary valuation and paperwork, a company-provided car is still a valuable fringe benefit for business owners and key employees. It can provide them with the use of a vehicle at a low tax cost while generating tax deductions for their businesses. (You may even be able to transfer the vehicle to the employee when you’re ready to dispose of it, but that involves other tax implications.)

Contact the team at Ramsay & Associates with additional questions surrounding company car perks and tax rules. We can help you stay in compliance with the rules and explain more about this fringe benefit.